There's a long history of giant technology companies seeing disruption coming a mile away and simply not being able to execute on being the disruptor rather than the disruptee. IBM (IBM 0.17%) was a leader in PCs, only to cede the most valuable piece (the operating system) to Microsoft (MSFT 0.16%). After dominating PC operating systems, Microsoft launched Pocket PC, a Windows mobile operating system, in 2000 -- only to be run out of the market by the Apple (AAPL -0.76%) iOS and Alphabet's (GOOG 1.12%) (GOOGL 1.07%) Android OS. There are other examples, but the common theme is that company leaders who see the opportunity ahead often can't steer the ship in the right direction to capitalize.
I fear we're already seeing this happen with Meta Platforms (META -0.45%) and its bet on the metaverse. The Oculus headsets were clearly out ahead of the competition, but Meta can't seem to find a clear strategy to capitalize on the metaverse vision, giving openings to competitors big and small.
Vision without direction
At small companies, it's easy for everyone to understand what the company is building and where it's going. Vision and direction are aligned. That doesn't guarantee success, but we've learned over decades that when founders are involved, the strategy a business takes is abundantly clear.
When a large company like Meta wants to shift direction, it needs to communicate that shift to employees and change its strategic direction. Meta has made the shift to the metaverse clear in a rhetorical sense:
- Founder and CEO Mark Zuckerberg is all-in on the metaverse, betting billions of dollars in acquiring Oculus and VR studios, and now spending $10 billion or more per year on the project.
- The name change from Facebook to Meta was a signal to investors and employees that the company is taking this seriously.
- Meta integrated Facebook with Oculus, putting its significant muscle behind growing the VR ecosystem to a market-leading position.
These moves are steps in the right direction, but they don't guarantee success. The idea right now is that Meta can use its current cash flow to out-spend the competition in building the hardware and software for the metaverse and virtual reality (VR) and augmented reality (AR), squeezing out the competition. But adoption is still extremely low and Meta doesn't have enough scale to be dominant.
Meta sold 8.7 million Oculus Quest 2 headsets in 2021, five years after the first Oculus headset was launched. For context, five years after the iPhone was introduced, Apple sold 125 million devices.
Slow adoption is a concern and allows competitors to catch up before scale is built. But there were some recent developments that are showing signs that Meta doesn't even have a clear direction in the metaverse:
- Meta recently announced that it shut down a project to build a VR/AR operating system, choosing instead to build on the Android platform.
- An internal chip unit was also told that Meta will use Qualcomm (QCOM -2.50%) chips in the upcoming Ray-Ban augmented reality glasses, rather than its internal design.
- Meta's Horizon Worlds also announced it will have a 25% fee for assets sold in its platform after paying the 30% fee for processing payments. In total, the fee would be 47.5%, although the 30% portion could go to Apple or another app platform.
Individually, these moves may have seemed wise, but collectively they show that Meta doesn't know what its metaverse strategy is. Is it a vertically integrated, premium supplier or a platform for everyone in the metaverse?
Meandering to somewhere?
Meta can't seem to decide whether it's a platform, a premium hardware maker, or something else.
The Oculus headset is made by Oculus but uses modular equipment, meaning there won't be a performance premium compared to a company like Apple, which is likely to make high-price, high-performance headsets in the future. Trying to be a metaverse platform isn't bad, but this is where Meta's other decisions are in conflict.
Oculus's Android-based operating system and App Store are extremely stringent on what content is allowed in. This isn't an open ecosystem like Steam. It's relatively closed, and since it's owned by Meta, the marketing team has an incentive to promote Meta's owned content like Population One and Beat Saber. Meta has thus far been unwilling to open the operating system to other manufacturers as well. Making an operating system for all hardware is why Microsoft dominated PCs, but that's not the direction Meta is going in.
Maybe the most problematic issue is that Meta doesn't control any of the most widely used development tools. Most VR and AR development is done on Unity (U 17.16%) or the Unreal Engine from Epic Games, which can create content for smartphones, VR headsets, and PCs. Developers have flexible tools and aren't locked into any piece of the Meta ecosystem.
Where does Meta go from here?
It seems to me that Meta is lost strategically. The company hasn't embraced vertical integration, like Apple has, with differentiated hardware and chips that will push the limits of performance. It also hasn't embraced being a platform with the operating system for VR and AR headsets or glasses that third-party headset manufacturers and software developers will build on.
Instead, Meta wants to control hardware and software while giving users products made with off-the-shelf components and hoping that developers don't notice they have other distribution options.
This strategy seems muddy at best, and as companies like Apple and Microsoft build AR/VR/metaverse products, they're likely to take a more coherent strategy to the market. Apple will be the high-end supplier with differentiated hardware, as it is in PCs and smartphones. Microsoft will be the operating system with multiple hardware partners and a large developer ecosystem. If those strategies play out, where does Meta fit?
I worry that this will be another case of Meta showing the way to tech competitors and then missing out on the opportunity at the end of the day.